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The 335 room Fremont Marriott Silicon Valley Defaults on $38.5 million Mortgage;
Joins Several Other Prominent San Francisco Bay Area Hotels
By George Avalos, Contra Costa Times, Walnut Creek, Calif.McClatchy-Tribune Regional News

October 6, 2009 - FREMONT -- A prominent Bay Area hotel, the Fremont Marriott Silicon Valley, has flopped into a $38 million-plus mortgage default, brutalized by a sour economy and feeble lodging market.

AEW Fremont LLC, the owner of the Marriott Hotel in Fremont, located on Landing Parkway next to Interstate 880, defaulted on the loan Sept. 17. The now-delinquent financing was provided in May 2007 by AIG Annuity Insurance Co., a unit of failed insurer American Insurance Group, commonly called AIG.

"The unprecedented adverse market conditions of the last year and resulting declines in revenue and cash flow" triggered the mortgage default, said Suzanne Schulz, an executive vice president with Everest Holdings. Arizona-based Everest controls the entity, AEW Fremont, that owns the 10-story hotel.

Despite the mortgage woes, the Fremont Marriott is still serving its patrons.

"The hotel continues to operate normally," Schulz said. "It remains open, receiving guests and taking reservations for future hotel stays. Marriott International continues to operate the hotel under the current, long-term management agreement."

The 355-room Fremont Marriott is far from the only prominent Bay Area hotel to suffer a delinquent mortgage during the past several months.

The Sheraton Pleasanton Hotel went into a mortgage default and was seized in June by its lender through a foreclosure. A similar fate forced the Coliseum Suites hotel in Oakland into the hands of its lender in March.

In San Francisco this year, the Renaissance Stanford Court Hotel and Four Seasons Hotel went into default on their respective mortgages.

Smaller hotel properties in Brentwood and Pleasant Hill also were hit with mortgage defaults.

"Every day there are more and more of these situations," said Jeff Higley, editorial director with Ohio-based Hotel News Now. "It's not a good time to be a hotel owner who has some serious debt on their property."

The owner of the Four Seasons said it is negotiating with its lender about its financing. Talks also are under way on the Fremont Marriott.

"The hotel owner and lender are currently in discussions regarding next steps," Schulz said.

AEW Everest bought the Fremont Marriott in May 2007, Alameda County property files show. That's when AEW obtained the $38.5 million loan from the AIG subsidiary.

Similarly, the Four Seasons received its financing in 2006 and the then-owners of the Sheraton Pleasanton got their mortgage at the end of 2005. The 2005, 2006, and 2007 time frames are deemed to be the peak of the bubble in commercial property values.

"In a lot of cases, the owners bought these hotels at the peak of the market, when capital was cheap, and they paid full retail price," said Tom Callahan, president of San Francisco-based PKF Consulting, which tracks the lodging market.

The nose-dive in the economy and the hotel industry emerged around September 2008, a double debacle that toppled the financial structures at more than a few inns.

"We estimate that room revenue in the Bay Area will be off about 20 to 25 percent," Callahan said. "That means a 40 to 50 percent drop in profits."

Through the end of August compared with the same eight months in 2008, occupancy, room rates and revenues have all slumped in the Bay Area's three major urban markets, according to research from STR Global, a consulting firm:

--The East Bay so far this year has suffered a decline of 14.6 percent in occupancy rates, 11.2 percent in room rates, and 23.1 percent in revenue.

--The San Francisco area has experienced a drop of 7.9 percent in occupancy, 15.7 percent in room rates, and 22 percent in revenue.

--The South Bay is down by 16.8 percent in occupancy, 14.4 percent in room rates and 28.5 percent in revenue.

A sharp decline in business travel has battered the East Bay and South Bay in particular. San Francisco has also stumbled with reduced business travel, but has been able to offset some of those problems with tourism.

Still, analysts believe the hotel problems are just one symptom of the ailments that have begun to increasingly afflict commercial real estate.

"These defaults are representative of what we are going to see in greater numbers in the near future," said Brad Kemp, director of regional research with Beacon Economics. "These defaults are the leading edge of what is going to happen in commercial real estate."

George Avalos can be phoned at 925-977-8477


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